Saturn Co. purchases a used machine for $144,000 cash on January 2 and readies i

Question

Saturn Co. purchases a used machine for $144,000 cash on January

2 and readies it for use the next day at an $8,000 cost. On January

3, it is installed on a required operating platform costing $1,600,

and it is further readied for operations. The company predicts the

machine will be used for six years and have a $17,280 salvage

value. Depreciation is to be charged on a straight-line basis. On

December 31, at the end of its fifth year in operations, it is

disposed of.

1.)

Prepare journal entries to record

the machine's purchase and the costs to ready and install it. Cash

is paid for all costs incurred

2.)

Prepare journal entries to record

depreciation of the machine at December 31.

3.)

Prepare journal entries to record

the machine’s disposal under each of the

following separate assumptions

Explanation / Answer

Purchase price $240,000
Additional cost $8,000
required operating platform $1,600
Total cost $249,600

Annual depreciation = ($249,600 - $28,800)/6 = $36,800

At the end of its 5th year, accumulated depreciation = $36,800 x 5 = $184,000, and net book value = $249,600 - $184,000 = $65,600

(a) it is sold for $ 24,000 cash
Dr Cash 24,000
Dr Accumulated depreciation $184,000
Dr Loss on disposal of machine $41,600
Cr Machine $249,600

(b) it is sold for $ 96,000 cash
Dr Cash $96,000
Dr Accum depr $184,000
Cr Machine $249,600
Cr Gain on disposal of machine 30,400

(c) it is destroyed in a fire and the insurance company pays $34,500 cash to settle the loss claim.
Dr Cash $34,500
Dr Accum depr 184,000
Dr Loss due to fire 31,100
Cr Machine 249,600

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